Energy transition company Vertex Energy, Inc. (VTNR) is a specialty refiner of alternative feedstocks or replacement fuel for industrial burners and a distributor of high-purity petroleum products. With VTNR’s refined product margins on conventional fuels hitting multi-year highs in the first quarter of 2022 and investors becoming more optimistic about its continued growth in used motor oil (UMO) collections, together with oil prices hitting a 13-week high last week, the energy company’s shares jumped 254.3% so far this year and 68.8% over the past month.

However, the stock has declined 2% over the past five days, with the U.S. stock market now in bear market territory amid a potential recession fear. While the environmental services company could benefit from the optimism surrounding the energy transition market, its losses broadened significantly year-over-year in the first quarter. Moreover, VTNR’s negative profit margin could be concerning. Although the energy company’s strong operational momentum and growing regional demand could help it improve its margins, its lofty valuation is not in sync with its growing losses.

Here’s what could influence VTNR’s performance in the near term:

Acquisition of Mobile Refinery

In April, the specialty refiner acquired the Mobile, Alabama refinery and related marine terminal and logistics assets from Equilon Enterprises LL for $75 million in cash, along with roughly $25 million for capital expenditures. While the acquisition positions the energy transition company to become a leading regional supplier of renewable and conventional products, it could increase its expenses and weigh heavily on its already weak balance sheet.

Volatility in Energy Market

With the financial market and oil prices experiencing wild swings amid jitters over a possible recession, inflation, and hike in interest rate, the energy market is expected to remain volatile. Moreover, with several countries facing challenges in boosting their crude output supply, oil prices are likely to remain volatile. Given that energy company VTNR is exposed to market risks related to the volatility of crude oil and refined oil products and interest rate risks, its stock price could witness a pullback in the near term.

Unstable Financials

For the first quarter ended March 31, 2022, VTNR’s gross profit came in at $1.54 million, down 27.6% in the prior-year period. Its loss from operations stood at $7.27 million compared to $760.94 thousand. VTNR incurred a net loss of $808.87 thousand and a loss per share of $0.24 over this period. In addition, the company reported a free cash flow of negative $10.81 million.

VTNR’s trailing-12-month gross profit margin of 3.4% is 91.4% lower than the industry average of 39.5%. Moreover, its net income margin, EBITDA margin, ROA, and ROE came in at negative 18.2%, 14.7%, 8.5%, and 74.2%, respectively. Furthermore, the company’s trailing-12-month cash from operations stood at a negative $30.49 million.

Stretched Valuation

In terms of trailing-12-month EV/Sales, VTNR is currently trading at 10.03x, which is 261.1% higher than the industry average of 4.01x. And its trailing-12-month Price/Sales multiple of 7.48 is 276.7% higher than the industry average of 1.99. Also, the company’s trailing-12-month Price/Book ratio of 10.26x is 336.4% higher than the industry average of 2.35x.

POWR Ratings Reflect Bleak Prospects

VTNR has an overall rating of D, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. VTNR has a C grade for Quality and an F for Stability. The stock’s negative profit margin and higher volatility are reflected in these grades.

Also, it has an F grade for Value. This is consistent with the company’s higher-than-industry Price/Sales ratio.

Beyond the grades I’ve highlighted above, we have also rated VTNR for Growth, Momentum, and Sentiment. Get all VTNR ratings here.

VTNR is ranked #88 of 100 stocks in the B-rated Energy – Oil & Gas industry.

Bottom Line

Although VTNR’s shares have gained significantly this year owing to its elevated refined product margins, soaring oil price, and rapidly growing commercial operations, the stock appears to be highly volatile given the risks in the energy space in an uncertain environment. On top of that, the stock’s stretched valuation and ballooning losses could cause its shares to tumble in the upcoming months. As such, the stock is best avoided now.

How Does Vertex Energy, Inc. (VTNR) Stack Up Against its Peers?

While VTNR has an overall POWR Rating of D, one might want to consider taking a look at its industry peers, Adams Resources & Energy, Inc. (AE) and Whitecap Resources, Inc. (SPGYF), having an A (Strong Buy) rating.

VTNR shares were trading at $14.64 per share on Monday afternoon, down $1.41 (-8.79%). Year-to-date, VTNR has gained 223.18%, versus a -20.05% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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